Liquidity risk is the risk of loss resulting from the inability to meet payment obligations in full and on time when they become due.
Liquidityrisk is inherent to the Bank's business and results from the mismatch inmaturities between assets and liabilities. It may be related to funding – impossibilityto obtain new funding – and to markets – inability to sell or convert liquidassets into cash without significant losses.
TheCEB manages liquidity risk in a prudent manner, holding a liquidity reserve ofhighly rated liquid securities to cope with periods of extreme marketconditions during which new funding would become inaccessible. The fundingstrategy is an important element of liquidity risk management, with the CEBdiversifying its debt issuance programs, funding markets and investor base toavoid over-reliance on individual markets or funding sources.
TheCEB measures liquidity risk using internal metrics and regulatory indicatorscomplemented by qualitative analysis in line with Baseland EU regulations. It defines its risk appetite based on the SurvivalHorizon metric, which measures the period during which it can meet its paymentobligations arising from ongoing business operations under severe stress scenarios,and also by meeting the regulatory requirements for the Liquidity CoverageRatio and the Net Stable Funding Ratio.
FAQs
Liquidity risk is the risk of loss resulting from the inability to meet payment obligations in full and on time when they become due. Liquidity risk is inherent to the Bank's business and results from the mismatch in maturities between assets and liabilities.
What best describes liquidity risk? ›
A liquidity risk is defined by an entity's lack of cash that hinders it from repaying short-term debt, resulting in excessive capital losses.
What is liquidity or credit risk? ›
Credit risk is when companies give their customers a line of credit; also, a company's risk of not having enough funds to pay its bills. Liquidity risk refers to how easily a company can convert its assets into cash if it needs funds; it also refers to its daily cash flow.
What are examples of liquidity risks in banks? ›
A liquidity risk example in banks is a decline in deposits or rise in withdrawals (which are liabilities for the bank). As a result, the bank is unable to generate enough cash to meet these obligations. This was dramatically illustrated by the global financial crisis of 2008-2009.
What are examples of liquidity? ›
Cash is the most liquid asset, followed by cash equivalents, which are things like money market accounts, certificates of deposit (CDs), or time deposits. Marketable securities, such as stocks and bonds listed on exchanges, are often very liquid and can be sold quickly via a broker.
What is high risk of liquidity? ›
Typically, high liquidity risk indicates that particular security cannot be readily bought or sold in the share market. This is because an issuing company might face challenges in meeting its current liabilities due to reduced cash flow.
What is liquidity for dummies? ›
Definition: Liquidity means how quickly you can get your hands on your cash. In simpler terms, liquidity is to get your money whenever you need it.
What is another name for liquidity risk? ›
There are two different types of liquidity risk. The first is funding liquidity or cash flow risk, while the second is market liquidity risk, also referred to as asset/product risk.
What provide liquidity risks? ›
Liquidity Provider Risks: Liquidity providers may be exposed to risks like slippage, asset depreciation, and impermanent loss, which can affect their overall returns.
Why do banks face liquidity risk? ›
Liquidity Risk
If a bank delays providing cash for a few of their customer for a day, other depositors may rush to take out their deposits as they lose confidence in the bank. This further lowers the bank's ability to provide funds and leads to a bank run.
Liquidity definition
Liquidity is a company's ability to convert assets to cash or acquire cash—through a loan or money in the bank—to pay its short-term obligations or liabilities.
What is the downside liquidity risk? ›
Downside liquidity risk is measured by higher moment of liquidity-liquidity skewness. Downside liquidity risk premium significantly exists in Chinese stock market. Downside liquidity risk premium is persistent within the future one year.
What are the three types of liquidity risk? ›
The three main types are central bank liquidity, market liquidity and funding liquidity.
Who is most affected by liquidity risk? ›
The fundamental role of banks typically involves the transfor- mation of liquid deposit liabilities into illiquid assets such as loans; this makes banks inherently vulnerable to liquidity risk. Liquidity-risk management seeks to ensure a bank's ability to continue to perform this fundamental role.
How to avoid liquidity risk? ›
Management of liquidity risk is critical to ensure that cash needs are continuously met. For instance, maintaining a portfolio of high-quality liquid assets, employing rigorous cash flow forecasting, and ensuring diversified funding sources are common tactics employed to mitigate liquidity risk.
What is liquidity risk quizlet? ›
What is liquidity risk? • The risk that an institution will not meet its liabilities as they become due as a. result of: - Inability to liquidate assets or obtain funding. - Inability to unwind or offset exposure without significantly lowering market price.
What is the liquidity value at risk? ›
The Liquidity-at-Risk (short: LaR) is a measure of the liquidity risk exposure of a financial portfolio. It may be defined as the net liquidity drain which can occur in the portfolio in a given risk scenario.
